Although the share of Americans with employer-sponsored insurance has been declining for the past couple of decades, the majority of the adult population—54%, as of 2023—continues to receive health coverage through an employer. For that reason alone, we think it's useful for healthcare leaders to stay on top of the latest trends in the ESI space: what's changed, what hasn't, and how employers are responding to their latest spending projections. The good news is, this is a corner of the industry that’s rife with data. Between the Kaiser Family Foundation, employer coalitions such as the Business Group on Health, and benefit consulting firms such as Mercer, PwC, and Willis Towers Watson, there’s a wealth of annually updated information out there. The hardest part is combing through it all to make sense of it, find consistent themes, and reconcile differences. The good news? We've done that work for you, and we had firsthand conversations with a number of employers to add some qualitative color. So in this post, we'll break down what we learned, and what to expect from employer healthcare spending in 2025.
Employer healthcare spending in 2025: By the numbers
Let's start with the numbers. And before we get into the projections for employer healthcare spending in 2025, it's helpful to look at the historical context. Employer healthcare spending, of course, goes up every year. The key to understanding how much strain medical spending is putting on employer budgets (and therefore what strategies they are likely to deploy) is to look at the rate of growth. For the past decade and a half, typical annual growth trend has hovered somewhere between 5 - 7%. (It's worth noting, by the way, that from a historical perspective, this range is low. In the early 2000s, it was not uncommon—and even typical—to see annual growth rates in the double digits). Across 2020 and 2021, the Covid-19 pandemic actually led to even lower growth rates. Many saw spending growth in the low single digits (or even flat), as utilization dropped dramatically. The years 2022 and 2023 represented a return to normal for most employers. But those days are past.
This year's round of survey data indicates that spending growth for 2024 ended up being somewhere between 7-8%—i.e. sightly outside of the recent, normal range. This is especially notable because it's NOT what employers projected would happen. In late 2023, employers reported that they expected 2024 spending growth to once again fall within that normal 5-7% range. It is, however, what we at Union thought was likely to happen, for two big reasons:
It was clear to us in the conversations we were having with employers a year ago that they were likely underestimating just how quickly their pharmacy costs were growing, both as a result of specialty medications, which have been growing for some time, but most notably because of GLP-1s.
We knew that we hadn’t yet seen the full impact of general inflationary prices as well the particularly acute pressure on healthcare costs fully manifest in provider prices. And we suspected that as more and more provider contracts came up for negotiation, price growth was likely to accelerate.
And in fact, these are two of the biggest reasons why employer healthcare spending in 2025 is expected to accelerate even further, with projections ranging from 7% on the low end to 9% on the high end.
Employer healthcare spending in 2025: Top cost drivers—and how employers are addressing them
In addition to medical inflation (i.e. prices) and drug costs, employers called out some specific clinical cost drivers as well; in particular: cancer, cardiovascular disease, and behavioral health. For the purposes of this post, we'll focus on price growth and drug costs, since those were the most universal "problem" areas cited by employers. Our members can access our ready-to-use slide deck and on-demand recording, where we delve deeper into the clinical cost drivers.
Top driver of employer healthcare spending in 2025: Medical inflation/prices
I want to start by first acknowledging that although employers are citing price growth as a major/current cost driver, it’s hard to assess the true magnitude of this phenomenon because the data we have on pricing tends to lag by a few years.
For example, if we look at the latest study that RAND has done on hospital prices (they’ve been tracking this for employers since 2017), the most recent data, released in May of 2024, extends only through 2022. What that data shows is that while commercial hospital reimbursement rates did increase relative to Medicare rates between 2020 and 2022, the difference isn’t huge. And in fact, it is almost identical to the differential between commercial rates and Medicare rates as of 2018. Of course, employers weren’t reporting elevated cost trend back in 2022. The years 2022 and 2023 were largely reported as a return to normal trend levels coming out of the acute phase of the pandemic. So it’s perhaps not surprising that the 2022 numbers don’t reflect any sort of acceleration in commercial pricing.
In terms of WHY employers are pointing to price acceleration for 2024/2025, it’s largely the reasons we alluded to before. Many provider contracts encompass at least a 3-year term. So the upward pressure on costs that hospitals have experienced in the past few years takes some time to actually show up in the contract negotiation process. If we look at broader data on healthcare inflation vs. general inflation, we know that year-over-year growth in healthcare prices actually lagged the growth in prices for all goods/services right up until late 2023/early 2024. So it would stand to reason that 2024 would be the first year that we would see employer healthcare spending accelerate as a function of those price increases, despite the fact that providers had already been experiencing upward pressure on their costs for years. We’ve been hearing anecdotally from employers that their expectation is that health systems will request double-digit price increases in upcoming contract negotiations, at least in some markets.
Industry insiders will know that the issue of healthcare prices, including commercial healthcare prices, has not gone unnoticed by federal lawmakers and regulators. The past few years have seen a flurry of new laws and regulations that either directly or indirectly take aim at commercial prices. So what impact have those policies had to date?
The short answer is that results thus far have been mixed at best (shocking, we know). Some—such as the Medicare drug price negotiation provisions of the Inflation Reduction Act—are actually expected to raise prices in the commercial sector, at least in the short term. Others, such as the new transparency rules governing health plans and hospitals, or the balance billing protections that were a part of the No Surprises Act, were initially expected to have a deflationary impact on commercial prices. But evidence on both of these is mixed currently.
With governmental policies showing no sign of meaningfully slowing commercial price growth in the short term, the main lever employers are looking to on price is network design. After falling out popularity following the managed care surge in the 90s, tiered and narrow networks have increased in popularity over the past five years. Nearly two-thirds of employers either have a limited network in place already, or are considering one for the future.
Of those who offer them currently, most rely on their existing carrier partners—largely national health plans—to facilitate those offerings. In response to demand, health plans have been growing the numbers of geographies within which they offer high-performance network options. A small but growing number of employers (just 2% today) are turning to third party vendors to help them design custom high-performance network offerings. Players such as Centivo, Imagine Health, and Firefly Health work with self-funded employers to aggregate custom networks. Some, such as Centivo and Firefly, also offer virtual primary care services which may be embedded within the network design, and provide an additional lever for steering employees to high-value providers (and avoiding low-value care altogether).
The biggest barrier to uptake of these networks remains the operational burden (and perceived disruption) associated with setting up differential network designs in different markets, for the many large employers who have a presence in multiple geographies. But if price growth continues to accelerate, willingness to concede on having a consistent benefit design nationally will likely increase as well.
Top driver of employer healthcare spending in 2025: Drug spending
The single most common spending driver cited across every survey we reviewed and every employer we interviewed, was drug spending, for two big (and unsurprising) reasons: the outsized growth associated with the price and utilization of specialty drugs, and the surging demand for and use of GLP-1s.
Employers have been concerned about the rising cost of specialty drugs for some time now—as of 2023, these drugs represent over half of all employer pharmacy costs, despite representing only 2% of prescription volumes. In many cases, emerging medications offering a lifeline to individuals with, up to this point, untreatable conditions. But with those incredible results come high costs. There are two distinct forces at play here that are putting pressure on payers:
On the one hand are rare diseases like Hemophilia B, for which we now have curative treatments with price tags in the millions.
On the other are medications that are, dose for dose, relatively cheaper, but treat much larger populations for much longer periods of time.
The category of CNS drugs illustrates this latter trend. For the last several years, we’ve seen amazing breakthrough in the treatment of central nervous system disorders, most notably treatments for Alzheimer’s disease. But up until now, those costs have been concentrated in the Medicare population. Just a few months ago, however, the FDA approved a new treatment for schizophrenia, the first in decades—which could apply to millions of Americans with commercial coverage. That drug is priced at $22,000 per year which, depending on uptake, could translate to billions of dollars in additional employer spending. Given the tremendous clinical potential of these types of drugs, employers have largely accepted them as a necessary cost to be absorbed. Some are carving out these drugs out of the pharmacy benefit and then working with employees to help them qualify for payment assistance programs. Others are experimenting with outcomes-based payment models. But beyond that, there’s not all that much that’s directly within the span of an employer’s control when it comes to these medications.
This is perhaps part of the reason that employers have fixated on GLP-1s, because there's a bit more that employers can inflect when it comes to these drugs. And, in fact, employers point to GLP-1s as the single cost driver growing faster than any other. According to the International Foundation of Employee Benefit Plans, GLP-1s accounted for nearly 9% of claims in 2022—and it's almost a certainty that that number has grown since then.
Still, the overall trend on GLP-1s among employers is still coverage expansion. Every year, the share of employers who cover GLP-1s for diabetes and/or obesity continues to grow. That said, 2024 was notable for the growing number of stories of prominent payers (including many employers) who decided to pull back on GLP-1 coverage—whether by eliminating coverage entirely for weight loss purposes, or by introducing lifetime spending caps for the drugs.
Beyond coverage, employers are taking some additional steps to ensure both the clinical and cost efficacy of these drugs. Many employers are introducing strategies designed to limit use (especially inappropriate use) of the drugs—for example, dialing up prior authorization measures, limiting prescription quantity, limiting prescription access to obesity-trained physicians, or introducing step therapy. Evidence has also shown that adherence is key to maximizing clinical efficacy. To that effect, some employers are recommending or even requiring participation in lifestyle modification programs, which have been shown to increase adherence and weight loss maintenance.
Parting thoughts: Employer healthcare spending in 2025
Overall, you might think that the acceleration in medical spend among employers would shift them squarely into cost containment mode, particularly after several years in which benefit enhancements were the clear priority amid a tight labor market and relatively low growth in healthcare costs. And while employers certainly will take some steps to curb spending growth—as noted throughout this post—there's only so much that lies within their span of control, especially given the massive amount of clinical innovation happening within the industry right now, and given the fact that the acceleration in provider prices is likely to be a "new normal" amid permanently-elevated labor costs. Making significant leeway on either drug costs or provider prices would likely require drastic action on the part of the federal government, something that doesn't appear imminently likely. But as a new administration transitions into the White House, we'll see how President-elect Trump and his healthcare team take up the mantle on issues like drug price negotiation, transparency, and more.
We'll be talking a lot more about healthcare spending trends, purchaser strategies, and the policy outlook for 2025 and beyond at our West Coast Insight Summit in Santa Monica on Thursday, January 30th. If you're a member and want to attend, reach out to your main point of contact. And if you're not a member but want to attend (or at least learn more), schedule some time with us to chat.